Magazine

If Dow Jones Says No Thanks

July 29, 2007

Should the Bancroft family, the controlling shareholders of Dow Jones & Co. (DJ), decide to reject Rupert Murdoch's takeover offer, prompting the mogul to take his $5 billion off the table and walk away, everyone knows what would happen. Dow Jones' stock price would fall from its recent highs in the upper 50s.

But by how much?

Opinions vary, as you might imagine, but here are three back-of-the-envelope scenarios that might just clarify what Dow Jones executives and their shareholders could face post-Murdoch:

SCENARIO ONE The stock falls below the $36 it fetched pre-deal. Even at that price, some on Wall Street assumed the stock had a takeover premium built into it, especially after Richard F. Zannino was promoted to CEO in 2006. It was believed in some circles that Zannino, a non-journalist, was prettying up the company for sale.

But given that the Bancrofts and the Dow Jones unions tried in vain to find an alternative buyer to Murdoch, the Street may figure there is zero interest in the company. Goodbye, takeover premium. "If Murdoch goes away, this stock could drop to the low 30s," says Harold Vogel, founder of media-investment firm Vogel Capital Management, which does not own Dow Jones shares. "Between what is going on with newspaper readership and weakness in ad revenue, it is not a pretty picture [for Dow Jones] in the near-term."

SCENARIO TWO The stock retains some sort of takeover premium--say $10 above the pre-offer price. So $46. You mean someone might still want to buy Dow Jones? It's possible. The prospect of competing with a $60 offer from Murdoch may have sent other potential bidders into their rabbit holes. But remove Murdoch and new interest may emerge.

Moreover, the Dow Jones board did approve the sale to Murdoch, signaling a willingness to part with the company. "Some deal is likely, as the genie is next to impossible to get back into the bottle," says an investment banker who asked not to be named. "A deal may come at a price in the 50s." Although given a lack of strategic buyers thus far, that price may be a stretch.

SCENARIO THREE Dow Jones executives get the message that drastic moves are needed to shore up the company. They act, and the stock trades at $40. Layoffs would reduce costs. And selling operating units (Ottaway Newspapers Inc., say) would provide the cash to buy a slug of the company's shares or goose the dividend, which could in turn warm up investors. The board, after all, will have to do something if Murdoch goes away, especially with newspaper industry fundamentals rapidly deteriorating.

So where does that leave us? If you take the three scenarios and average the stock prices of each, you get just over $40. However, if you assume that Scenarios Two and Three are more likely to happen, you could come closer to $43. Either way, it's well under Murdoch's bid and the stock's June 1 high of $61.

It's also telling to look at what's happening in Dow Jones put options trading, when investors secure the right to sell a stock at a specific price within a designated period. "Options speculators are more bearishly aligned toward DJ now than at any other time during the past year," says Jocelynn Drake, an options analyst with Schaeffer's Investment Research Inc. Traders have been increasingly buying options that protect them in the event that the stock falls to $35 by September--suggesting a floor for the share price.

Should Murdoch bail and then the Dow Jones board, at the urging of the Bancroft family, sign off on a "friendlier" sub-$60 bid, it would surely open the floodgates to lawsuits. Shareholders might rightly fume over money left on the table, which could bring up a perverse incentive: The board might ultimately feel it has to veto any sub-Murdochian bids. So Dow Jones may have to sell big, or not sell at all.